Venture capital financing can be a great way to grow your startup, but it’s important to understand the terms of the investment before you sign the documents. There are a number of things that founders should watch out for in venture capital financing documents. While we can’t capture all of them in one blog post, here are 5 things to look out for in venture capital financing documents:
- Valuation: Valuation is the price per share that the investors are paying for your company. It’s important to make sure that you feel the valuation is fair (and of course be reasonable and consult advisors in this determination).
- Dilution: Dilution measures the amount of ownership that you’ll lose as a result of the investment. It’s important to understand how much dilution you’re facing and how it will affect your control over the company.
- Liquidation Preferences: Liquidation preferences give the investors the right to get their money back before you or other shareholders do in the event of a liquidation. This typically comes into play in the event of an exit, such as an acquisition.
- Voting Rights: Voting rights determine who has control over the company’s decisions. It’s important to make sure that you and your team retain enough voting rights to maintain a level of control of the company that the team is comfortable with.
- Right of First Refusal and Co-Sale Agreement: A right of first refusal (ROFR) gives the investors the right to match any offer you receive to sell your shares, potentially giving the investors greater control over your company. A co-sale agreement gives the investors the right to sell their shares at the same time as you do.
In addition to the items above, there are a few general things that founders should keep in mind when reviewing venture capital financing documents:
- Get legal advice: Hopefully it goes without saying that it’s important to have a lawyer who has experience with venture capital financing review the financing documents before you sign them. An experienced lawyer can help you understand the terms of the investment and protect your interests.
- Ask questions: If you don’t understand something, ask. Ideally you would ask a lawyer who has experience with venture capital financing (who again can help you understand the terms and protect your interests).
- Don’t be afraid to negotiate: Investors are likely not going to give you everything you want, but you should be prepared to negotiate the terms of the investment. Be prepared to walk away from the deal if you’re not happy with the terms.
- Get everything in writing: If it’s not in writing, it’s almost as if it didn’t happen – don’t rely on spoken promises. Make sure that everything is in writing so that there are no misunderstandings later.
- Read the fine print: Don’t just skim the financing documents. Take the time to read the documents carefully and understand all of the terms.
Venture capital financing can be a great way to grow your startup, but it’s important to protect your interests by understanding the terms of the investment. By watching out for the key issues discussed in this blog post, you can make sure that you’re getting a fair deal and that you’re not giving away too much control over your company.
At TKA Law Firm, we have experience handling venture capital financing transactions. Feel free to contact us at 844-2-TKALAWFIRM (844-285-2529) or team@tkalawfirm.com to discuss how we can assist with the venture capital financing process.
This information is presented for general informational purposes only, is not for the purpose of providing legal advice and is not intended to represent a full or complete list of all possible issues. This information should not be construed as legal advice and does not create an attorney-client relationship. You should seek the advice of an attorney regarding your particular situation.
